 Interpreting the Unconventional U.S. Monetary Policy of 2007-09No 7635, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: This paper reviews the unconventional U.S. monetary policy responses to the financial and real crises of 2007-09, divided into three groups: interest rate policy, quantitative policy, and credit policy. To interpret interest rate policy, it compares the Federal Reserve?s actions with the literature on optimal policy in a liquidity trap. This comparison suggests that policy has been in the direction indicated by theory, but it has not gone far enough. To interpret quantitative policy, the paper reviews the determination of inflation under different policy regimes. The main danger for inflation from current actions is that the Federal Reserve may lose its policy independence; a beneficial side effect of the crisis is that the Friedman rule can be implemented by paying interest on reserves. To interpret credit policy, the paper presents a new model of capital market imperfections with different financial institutions and a role for securitization , leveraging, and mark-to-market accounting. The model suggests that providing credit to traders in securities markets is a more effective response than extending credit to the originators of loans. Keywords: Financial crisis; Liquidity; Liquidity trap; Price-level determination (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7635 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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